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The Enforcement Directive permits punitive damages - or does it?

The common reading of the ECJ's (yes) recent judgment in case C-367/15 - OTK is that the Enforcement Directive (Directive 2004/48) does not compel Member States to introduce punitive damages for infringement of intellectual property rights, but allows for national law to impose punitive damages (see, e.g., the case reports on IPKat or Kluwer Patent Blog).

But a closer reading of the decision casts some doubt on this common understanding. In the answer to the question (for the background of the case see the IPKat post), the ECJ states "Article 13 of Directive 2004/48/EC ... must be interpreted as not precluding national legislation ... under which the holder of an intellectual property right that has been infringed may demand from the person who has infringed that right either compensation for the damage that he has suffered ... or, without him having to prove the actual loss, payment of a sum corresponding to twice the appropriate fee which would have been due if permission had been given for the work concerned to be used."

In the grounds for the decision, the Court further elaborates (paras. 29-31, emphasis added):

In addition, without there being any need to rule on whether or not the introduction of ‘punitive’ damages would be contrary to Article 13 of Directive 2004/48, it is not evident that the provision applicable in the main proceedings entails an obligation to pay such damages.

Thus, it should be pointed out that, where an intellectual property right has been infringed, mere payment of the hypothetical royalty is not capable of guaranteeing compensation in respect of all the loss actually suffered, given that payment of that royalty would not, in itself, ensure reimbursement of any costs — referred to in recital 26 of Directive 2004/48 — that are linked to researching and identifying possible acts of infringement, compensation for possible moral prejudice (...) or payment of interest on the sums due. Indeed, OTK confirmed at the hearing that payment of twice the amount of the hypothetical royalty is equivalent in practice to compensation of an amount remaining below what the holder would be able to claim on the basis of ‘general principles’, within the meaning of Article 79(1)(3)(a) of the UPAPP.

It is admittedly possible that, in exceptional cases, payment for a loss calculated on the basis of twice the amount of the hypothetical royalty will exceed the loss actually suffered so clearly and substantially that a claim to that effect could constitute an abuse of rights, prohibited by Article 3(2) of Directive 2004/48. It is apparent, however, from the Polish Government’s observations at the hearing that, under the legislation applicable in the main proceedings, a Polish court would not be bound in such a situation by the claim of the holder of the infringed right.

From the first sentence emphasized in the passages cited above it becomes clear that the Court of Justice explicitly did not address the issue of whether Article 13 of the Enforcement Directive prohibits punitive damages, because according to the Court, the amount payable in the present dispute does not amount to punitive damages.

Looking closely

The second emphasized sentence makes clear that a "compensation" that substantially exceeds actual damages suffered may constitute an abuse of right. This sounds harmless enough - but to assess whether the hypothetical (double) royalty exceeds the actual loss suffered, the actual loss needs to be calculated, and that is exactly what provisions setting a hypothetical royalty want to do away with, because it is difficult and costly. It also raises the question of burden of proof - generally, the burden of proof for losses suffered lies with the party claiming compensation (typically the rightsholder). Where the law provides for a double royalty payable irrespective of actual loss suffered, the burden of proof that the double royalty "substantially exceeds" the actual loss is however an exception that needs to be proven by the party invoking the exception, i.e. the infringer.

In sum, the judgment in C-367/15 - OTK leaves room for debate whether the statutory damages due in a specific case are permitted under the Enforcement Directive, and it specifically does not address whether "punitive" damages are permitted under the Enforcement Directive.

2 comments:

I just wanted to briefly point out that are plenty of solid arguments that support a different understanding of the statements made by the ECJ (even if the view expressed by the IPKat is quite elaborate and interesting).

The IPKat analysis of the statements by the ECJ starts directly after the paragraph in which the court explicitly states that punitive damages are not prohibited under the enforcement directive. The statement might be obiter dictum, when you consider that the question from the Polish court can be answered regardless of if the enforcement directive allows for punitive damages or not (the court held that the doubling of the hypothetical licensing fee was not punitive damages). Nevertheless, it is quite clear that the court confirms the view that the directive only sets the minimum standard and that it does not prohibit punitive damages. This also gives the national courts a lot of room to maneuver, which is most likely a good thing, even if some courts would be happier with exact formulas for calculation...

It could also be argued that the court wants to establish the "upper" limit of the enforcement directive as abuse of rights INSTEAD of punitive damages. Abuse of rights should must likely be seen as its own legal concept, and can only be invoked under certain circumstances (it is different from merely making punitive additions to the damages). To me, it really seems like the ECJ really knew what they were doing when introducing the concept of abuse of rights into the discussion. One of the conditions for invoking abuse of rights is that the damages exceed the ACTUAL damage. That means that it can only be invoked in the super-rare cases where the actual damage can be proven in an ideal-typical fashion but the national court regardless of this choses a different method and substantially goes beyond the actual damage (and beyond the need for effeciency and deterrence, I suppose). But in most cases, the actual damage cannot be proven and other methods must be used – and that is all fine; going beyond the proven damage, when it is hard to prove, seems to be the pragmatic approach in most cases.

Very interesting thoughts, thank you. Considering, on the one hand, damages based on a double hypothetical license fee based on the Polish provision not to be contrary to the Enforcement Directive ("ED") while on the other hand referring to a concept of "abuse of rights" (based on art. 3 (2) if the ED) in "exceptional circumstances" is not entirely unproblematic. Especially as the ED is a minimum directive. Where should the line be drawn, i.e. when is actual loss "clearly and substantially" exceeded? As rightly pointed out in the post, you would indeed have to know the actual loss to determine this, wouldn't you? Getting into this discussion kind of takes the jist of the the whole provision, which allows the IP holder to rely on a hypothetical license fee instead of actual damages. Also, it appears quite convenient for the Court to be able to drop the question of a triple hypothetical license fee (due to the judgment from the Polish Constitutional Court). As a result, quite a few questions are left open...

Finally, whether or not one should talk about "punitive damages" or not in any particular instance would require a reliable definition as to what actually is meant by this term. If punitive damages would for example be defined as damages exceeding the actual damages/loss suffered, the Court would here have had to know exactly what the actual loss suffered was - did it?

On 1 February, I also reported on the judgment here: http://trustinip.com/punitive-damages-slipping-into-ip-enforcement-in-europe/#more-492